House buyers that borrow many times their income to fund their dream home have been warned by the head of the UK's financial watchdog that they are engaging in a "dangerous practice."

Sir Howard Davies, the head of the Financial Services Authority (FSA), said that in areas where house prices were at an historic high, such as London, overstretched home buyers were at risk.

If I keep warning I guess one day I will be right

Sir Howard Davies, FSA

The warning came as a poll of property market experts concludes that Britain's red-hot property market will cool next year.

The rate of property price increase is expected to slow but an early 1990s-style crash is not on the cards.

Irresponsible lending

Sir Howard was appearing in front of the Treasury Select Committee of MPs to be quizzed over the performance of the City regulator in the face of successive mis-selling scandals.

MPs were concerned that mortgage lenders were engaging in irresponsible lending practices.

Sir Howard's warning was given to a committee of MPs

Some lenders were accused of lending mortgage borrowers five or six times their income.

Sir Howard agreed that if house prices fell borrowers that had borrowed many times their income or had taken out a 100% mortgage could be exposed.

London was singled out as an area where a softening of house prices could lead to homeowners facing negative equity.

As for action, Sir Howard said that he had issued "two or three warnings" on the subject of irresponsible lending.

"If I keep warning I guess one day I will be right, " he told MPs.

Price correction

Sir Howard's warning came as a Reuters poll of property market experts indicated that a price slowdown was imminent.

The mid-range forecast was for house prices to grow by 20% this year, and by 13% in 2003.

We think it's going to be an autonomous slowdown, with demand reducing almost of its own accord and people either unable or unwilling to pay for an overpriced asset

Sabina Kalyan at Capital Economics

But none of the experts polled expected a slump.

The survey comes amid fears that the property market could crash after several years of runaway growth, sharply reducing consumer spending and putting the economy at risk.

Bubble

On Wednesday, the Bank of England warned that there was a growing danger of a "sharp correction" in house prices.

Most of the experts polled by Reuters felt there was little danger of a crash in the absence of an obvious trigger such as a rise in interest rates or unemployment.

"We think it's going to be an autonomous slowdown, with demand reducing almost of its own accord and people either unable or unwilling to pay for an overpriced asset," said Sabina Kalyan at Capital Economics.

However, others were less confident that prices would cool of their own accord.

"Higher rates and a substantial pick up in unemployment look unlikely next year. So in our view the bubble could keep developing over the course of 2003, making a potentially bigger problem further out," said John Butle, chief economist at HSBC bank.